Before reaching financial milestones such as a car, home, or savings account, a credit rating might be the only thing young people own.
“Credit is a highly valuable asset,” says Ed Rempel, a fee-for-service financial planner, tax accountant and author of the blog Unconventional Wisdom. “In fact, it is your main asset until you can build up other investments.”
Even for those with generally good spending habits, some common mistakes can tarnish, or even outright tank, a credit rating – and it’s not always as obvious as serious debt.
Disputing or missing bills
Rempel sees a lot of disputes with phone companies dragging down credit ratings.
A person may dispute a bill and refuse to pay it out of principle until the complaint is resolved. This becomes a debt that goes into collection and your rating can take a major hit, Rempel says.
Unpaid parking tickets, gym memberships and retailer credit card balances can create similar issues, says mortgage broker Shannon Mayhew.
“It is the little things,” says Mayhew, owner of West Coast Broker. “Maybe you moved and you didn’t receive the statements – that’s usual story that we get: ‘I didn’t receive the statements. They didn’t contact me.’ Maybe there’s some extra charges that came on after they thought they paid the balance.”
One of Rempel’s clients was a lawyer who disputed a $50 charge with a company, assuming the company would never sue a lawyer for such a small amount, Rempel says. Years later, trying to buy a home, his rating took a hit from the small outstanding collection.
Paying late, not paying in full
Late payments can also dent your credit rating, Rempel says.
The fix is simple: set up automatic payments through your bank.
Rempel had a client with a $10 credit card bill – it was such a small amount, they decided to pay it later, and went on a planned vacation. On that trip, they put $10,000 on their credit card – and came home to a $200 interest bill. Throughout that month, interest accrued on the new spending, not just the missed $10.
“If you leave even a tiny amount outstanding,” Rempel explains, “then you are charged the 20 per cent interest on the balance and all new purchases from the date of the purchase.”
Meanwhile, Mayhew says to be aware of potential processing delays that can occur when paying off bank credit cards using funds from a different financial institution. Even if you are paying right on deadline, it might arrive late.
Some clients say ‘I missed the payment, but just a little bit, a couple of days late, it wasn’t really a big deal,”’ Mayhew says. “Well, it is a big deal, because it shows on your credit bureau.”
Younger generations, while tech-savvy, can still fall prey to scams, fraud and unhelpful social media messaging from investment opportunities to crypto, or even viral trends that won’t work for everyone.
Investment and get-rich-quick scams can send people into debt spirals, says Jeffrey Schwartz, executive director of Consolidated Credit Canada, a non-profit credit counselling organization. Phishing scams steal personal information, which can be used for credit fraud.
“A lot of it is either misinformation, or lack of knowledge,” Schwartz says. “Credit is something that you really want to guard when you do obtain it. And one of the things you have to do is keep on top of it – check your credit score, check your credit report on a regular basis to ? make sure there aren’t any errors, or you haven’t been a victim of fraud.”
Errors on credit reports are not uncommon, but you can engage with the bureaus to dispute or resolve them, Schwartz says. Consulting with a financial expert also helps.
“If there’s an issue, reach out, get some help, talk to somebody,” Mayhew says. `”I personally go through credit reports line by line, and ask my clients what happened. Is this correct? Is this factual? Because sometimes they do not report factually.”
Don’t say ‘consolidation’ at the bank
To manage debts, it’s sometimes wise to combine a few balances into a loan with a lower interest rate, Rempel says.
“Tell the bank you want to refinance a couple of amounts to get a lower rate and simpler situation,” he says, “but don’t say ‘consolidation.”’
When a bank hears “consolidation loan,” it tells them your debts are too high, Rempel explains. There’s a code associated with the term, and this will hurt your credit.
If qualifying is a challenge, he adds, you can tell them which debts you are paying off, so they can factor that into your affordability calculation.
Income loss or sudden, major expenses can destroy your finances if you only have credit cards available to draw on since sky-high interest rates can haunt you for years.
Rempel advises setting up a line of credit, which have significantly lower interest rates than credit cards, to have just in case life throws you a curveball.
Contrary to some financial advice, he adds that people should resist the urge to build an emergency savings account. A big pile of cash is better invested at high returns, rather than sitting dormant in a low-interest savings account, he says.
“It is very expensive to have a large amount sitting in savings for many years,” Rempel says. “You don’t need an emergency fund, you need an emergency plan.”